Economics, 3rd Edition

The Path to Global Recession

The problems in financial markets began to translate themselves to the real economy fairly quickly. As the 

housing market slumped, many people involved in real estate were affected. The number of jobs created 

in the US that were linked to the house price boom began to be reversed. As confidence fell, economic 

activity declined across many parts of the world. The effect of the tight credit market helped exacerbate 

the depth of recession in many countries. Businesses, especially small businesses, rely on cash flow for 

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790  PART 15  INTERNATIONAL MACROECONOMICS

their survival. Many need flexibility and understanding from their banks when faced with shocks to their 

cash flow and the tight credit markets meant that many businesses found banks unwilling to lend to them 

and to extend overdrafts. If the bank was prepared to lend, the interest rate attached to the loan was often 

prohibitive. Faced with cash flow problems and an inability to get the finance to support them many smal-

ler businesses began to close. Larger businesses were not immune from the problems. The motor vehicle 

industry, in particular, suffered significant falls in sales. In January 2008, monthly production of vehicles 

in the US was 817,767; by February 2009 this had fallen to 388,267 – a fall of 52.2 per cent in just over a 

year. The fall in production affected component suppliers and the negative multiplier effect worked its way 

through the economy.

As demand fell, businesses closed and unemployment rose. In the US, the unemployment rate rose 

from 6.2 per cent in August 2008 to 9.7 per cent a year later (US Bureau of Labor Statistics), the unemploy-

ment rate in the UK rose by 2.4 per cent over the same period and unemployment across the EU reached 

9.7 per cent in 2010–2011. The increase in unemployment impacts on business confidence. High street 

sales in many countries slowed, spending on goods and services with a relatively high income elasticity of 

demand also fell and as this happened business saw revenues falling with the resulting pressure on cash 

flow. Many businesses cut back on stocks and this further affected businesses along the supply chain. 

The Boston Consulting Group (BCG) produced its Global Wealth Report in September 2009 which looked 

at the asset management industry and estimated that global wealth had fallen by 11.7 per cent in 2008 to 

around 

$92 trillion (about €72 trillion or £60.5 trillion).